Credit scores' link to insurance rates tested

Oregon is the latest battleground in an effort by consumer advocates to block insurers from using credit scores to set auto and homeowner rates.

On Nov. 7, Oregonians will become the first voters in the USA to decide whether to bar insurers from setting premiums based on such factors as credit history, debt load and bill-paying habits.

The insurance industry, which opposes the measure, is pumping millions of dollars into an ad campaign to defeat it. The outcome will be closely watched by other states that could come under pressure to take similar steps if the Oregon ballot measure succeeds. Hawaii, California and Massachusetts already have bans.

The battle comes as the use of credit scores — 92% of insurers factor them into auto rates, Conning Research & Consulting says — is under scrutiny elsewhere:

• The Michigan Court of Appeals will decide whether insurers can use credit scores to set rates. The state insurance department had barred such use of the scores, but its ban was struck down by a state judge.

• The U.S. Supreme Court has agreed to review lawsuits that complain that insurance companies failed to inform consumers that low credit scores led to higher rates. The lawsuits argue that failure to do so violated the Fair Credit Reporting Act.

• Oregon lawmakers in 2003 barred the use of credit scores to set rates for consumers with existing insurance policies. Measure 42 on the Nov. 7 ballot would go further by banning the use of credit scores in calculating rates for new customers.

"We've always been concerned that credit scores create unfair insurance rates," says Norma Garcia, senior attorney at Consumers Union. "And the use of them is increasing."

Only about one-third of consumers know that their credit history could affect their insurance premiums, a 2005 report by the Government Accountability Office found.

The industry argues that eliminating credit-based scoring would likely mean that people with good credit would end up paying higher insurance rates. But Garcia notes that in California, insurance rates have dropped since the use of credit scores was banned.

Insurers also argue that people with low credit scores are likelier to file insurance claims. "People who manage their finances well tend to also manage other important aspects of their lives responsibly, such as driving a car," the Insurance Information Institute says.

Consumers Union says there's no proof of that. A review of how credit scores are used to set rates in Texas found that the scores have more to do with economic status than with personal responsibility, says Birny Birnbaum, a former Texas insurance regulator who is executive director of the Center for Economic Justice, a consumer advocacy group.